econ final Flashcards
Current Account formula
• CA = TB + NFIA + NUT
GNE formula
C+I+G measures country total spending on final goods
GDP Y
C+I+G+X-M measures total production
GNI
GDP+NFIA total payments to domestic factors
GNDI
GNI+NUT=GNE+CA measures economys disposable income
NUT
UTin-UTout
TB
exportsgoods and services-imports goods and services
NFIA net factor income from abrouad
exports of factor services-import of factor services
exchange rate of country h and f Eh/f
1/Ef/h
appreciation currency
if a countries currency appreciates MS decreases i increases and you can buy more goods in other countries
depreciation of currency
MS increases i decreases and you can buy less in other countries
CIP
I$=Ieuro+change in E^e
which factors effect IS
government spending, interest, spot rate, prices and foreign prices, decrease in demand increases IS
which factors increase LM
rise in the MS decrease in MD
assumptions of IS LM model
The economy begins at long-run equilibrium, where the IS & LM
curves intersect.
• We then consider policy changes in the home economy, assuming
that conditions in the foreign economy (i.e., the rest of the world)
are unchanged.
• The home economy is subject to the short-run assumption of a
sticky price level at home and abroad.
• We assume that the forex market operates freely and unrestricted
by capital controls.
- Short-run model: which variables are fixed and which variables are allowed to change?
- The government behavior is exogenous (G and T are taken as given)
- Conditions in the foreign economy are exogenous (Y* and P* are taken as given).
- GDP = GNDI, which means that CA = TB (NFIA and NUT = 0)
Balance of Financial Accounts FA
B-L =asset ex -add import
Saving S
Y-C-G
PPP
Purchasing power parity refers to the law of one price and says that a basket of goods will be the same price in different countries so that consumers can not benefit from arbitrage
Balance of payments has three categories
KA+CA+FA=0
KA
KAin-KAout
ORT
if BOP>0
Law of one price and absolute PPP
Pa=Ea/b*Pb
Real exchange rate
P*spot for foreign country/ P us basket in forex
relative PPP and absolute PPP
if absolute PPP holds then relative PPP holds but not the other way around
cross exchange rate
uses three currencies Eab= (Ea$)/(Eb$)
expected inflation
inflation of country 1 - infation of country 2
PPP indicates That?
the exchange rates should equal the relative price level in the two countries and the real exchange rate should equal 1 also evidence for PPP is more geared towards long run
Monetary approach in long run
explains price levels with money supply and real income interest and prices must be flexible monetary no good in short run
time series graph longrun for increase in MS 5things
1)causes inflation an interest rates to rise and 2)real money to drop 3)price level jumps and 4)inflation increases 5)exchange rate jumps and rate of depreciation increases
What causes and Increase to MD
an increase in real income
permanent expansion in home money supply short run
permanent MS increase leads to lower i lower DR higher FR
Permanent expansion in the home money supply long run
prices rise and money supply returns nominal interest returns DR returns FR remains sleightly higher but goes back from the SR
the trilemma
Capital Mobility MOnetary autonomy fixed exchange rate
Temporary home monetary expansion
causes home interest rates to fall and home exchange rates to depreciate
factors that increase demand
fall t rise g fall i rise E rise P* fall in P
IS curve
the IS curve slopes downward and to the right. This assumes the level of investment and consumption is negatively correlated with the interest rate but positively correlated with gross output.
influenced by G T i* spot, P* P when demands increases IS shifts right
LM curve
y contrast, the LM curve slopes upward, suggesting the quantity of money demanded is positively correlated with the interest rate and with increases in total spending, or income.
shifts right when MS rises and MD falls
IS curve shifters
increases to net exports, wealth, governemtn spending, shift IS right taxes increase shift IS left
MOnetary policy does not change the IS curve
Fiscal policy shifts IS
LM curve shifter
Norminal money supply nominal interest rate increase LM shifts right.
fiscal policy does not change the LM curve
As price level increases LM shifts left
Monetary policy shifts LM
National Income Identity/ Open economy identity
Y=C+I+G+CA
Current Account Identity
S=I+CA or
Y-C-G=I+CA
